When it comes to investing, people usually look for effective strategies to make money. Some investors choose real estate, and mutual funds and others prefer stocks or bonds. Stocks can be a great choice for both short-term and long-term investments. Investing in stocks not only gives you the scope to make money but also makes you the owner of a part of a company. There are a few things to consider when selecting stocks for any company.
10 Essential Criteria to Consider for Selecting Stocks
For non-technical common investors, understanding stock market fluctuations is difficult. If you want to buy a stock, you must keep in mind some factors. Here are 10 factors you need to know, according to experts.
Company Background Analisis
Buying shares in a company means buying partial ownership of that company. So proper review of the qualitative aspects of that company is very important. You will need to check whether the company’s products or services are popular with its customers. Besides, don’t forget to check who is managing the company.
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You can do a Google search or ask people you know about how the company’s managers are—whether they are trustworthy as your partner or not. Also, look for what is the competence, integrity, and innovation of the company’s managing director and other senior officers—their qualifications, training, business success, and more.
Price-to-Earnings (P/E) Ratio
The price-earnings ratio is a measure of how many times a company’s shares are selling for its earnings. If the earnings per share of a company are Tk5, and the market price of the share is Tk45, then the price-earnings ratio will be 9. This means that if the company distributes all of its earnings as dividends, it will take 9 years to recover the invested money.
But if the market price of the share was Tk 100, then the price-earnings ratio or PE ratio would be 20. That is, if the company’s income stream remains unchanged, it will take 20 years to return the investment. The market average P/E ratio is 20-30. The lower the PE ratio, the lower the risk of the investment.
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Net Asset Value Per Share
Before buying a company’s share, check asset value per share. There should be an adjustment of the market price with this. However, unless the company goes into liquidation, the investor does not really care about the asset value.
Only shareholders can get a portion of those assets when the company is bankrupt. In this case, the bank loan and other dues are paid off before the sale price of the asset. After that, anything left over is distributed among the shareholders.
Earnings Per Share
Check the Earnings Per Share (EPS). However, it depends on the company. The more it is, the better. Higher EPS means higher dividend potential. If the EPS is low, the dividend potential is also low.
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Capital Utilization Efficiency of The Company
A company that can invest more of its capital in more profitable projects is expected to benefit its shareholders. On the other hand, if a company invests a lot of capital in a less profitable project, its profits and share price have less possibility to improve.
For example, banks that have invested more capital in mobile banking or digital banking projects over the last 10 years have done much better in terms of profits and share prices than banks that have invested in stock brokerage projects.
Balance Sheet
Generally, companies whose financial debt is much higher than their total assets (over 60-70%) have a higher risk of losing their shareholders’ capital. So, one should be careful while investing in such companies.
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Total Number of Shares
Before you buy stocks of any company, check their total number of shares and see how much it floats. According to the demand-supply formula, if the number of shares is low, its price is more likely to increase. On the other hand, if the number of shares is more, it is more readily available in the market.
In addition to that, it is better to buy shares that are traded regularly. Because if you need money on an urgent basis for any reason, it is possible to collect money easily by selling shares. But if you invest in shares that are not traded regularly, it is not possible to withdraw the investment on an emergency basis.
The Ratio of Authorized Capital to Paid-Up Capital
Issuance of bonuses and right shares is quite difficult if these two capital amounts are close. In this case, the company should increase the authorized capital earlier. Investors with a particular inclination towards bonus dividends should take note of these factors. A rule of thumb is that paid-up capital can never exceed authorized capital.
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Dividend Yield
The market value of the shares may be higher than the face value in most cases. Hence the dividend rate does not indicate the actual return. The dividend yield is the exact return of shares, which is the percentage of dividends received on the investment based on market value.
The dividend yield ratio is obtained by multiplying the declared dividend by 100 and dividing it by the market price of the respective shares. The higher the yield, the higher the investor’s earnings.
Track Record
Check the company’s last 3-4 years' track record. See how much it pays in dividends. Also, check the annual average price and try to buy shares close to this price.
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Final Words
So far, we have shared what to consider before buying stocks or shares. When buying a stock, remember profit must be ensured at the time of buying, not at the time of selling. That is, if you can buy shares at a good price, there will be a good chance of good profit. If you buy a share at a high price, the profit potential will decrease a little. Additionally, it should be remembered that hasty decision decisions are not good in the share market.